German Bunds Rise on Spanish Concern; Italian Securities Weaken

Aug. 30 (Bloomberg) -- German bunds advanced, with 10-year
yields approaching a four-week low, after Murcia became the
third Spanish region to say it will need emergency loans,
boosting demand for the euro-area’s safest assets.

Italian 10-year bonds weakened even after borrowing costs
dropped at an auction. Spanish securities slid as Valencia also
signaled it needs funds, a day after Catalonia said it required
5 billion euros ($6.3 billion). European Central Bank policy
makers meet in Frankfurt on Sept. 6, when president Mario Draghi
may announce details of the bank’s latest efforts to lower the
borrowing costs of countries such as Spain and Italy.

“As the situation in the periphery becomes more volatile
into the ECB meeting, there is still margin for bunds to rally
from here,” said Gianluca Ziglio, a fixed-income strategist at
UBS AG in London. “I would expect yields to fall back to the
1.25 percent to 1.20 percent level into September.”

Germany’s 10-year yields fell six basis points, or 0.06
percentage point, to 1.32 percent at 4:36 p.m. London time. They
dropped to as low as 1.30 percent yesterday, the least since
Aug. 3, and have increased four basis points this month. The
1.75 percent bond due in July 2022 climbed 0.59, or 5.90 euros
per 1,000-euro face amount, to 103.01.

German bunds also rose as a report showed economic
confidence in the euro area fell to a three-year low in August.

An index of executive and consumer sentiment in the 17-nation euro area dropped to 86.1 from 87.9 in July, the European
Commission in Brussels said today. That’s the lowest since
August 2009. Economists had forecast a decrease to 87.5, the
median of 26 estimates in a Bloomberg News survey showed.

Italian Auction

Italy sold 7.29 billion euros of five- and 10-year
securities, compared with a 7.5 billion-euro maximum target. The
yield on the new 10-year bond was 5.82 percent, compared to a
rate of 5.96 percent at a similar auction on July 30.

“It’s obviously a very good auction,” said Charles Berry,
a bond trader at Landesbank Barden Wuerttemberg in Stuttgart.
“It’s encouraging to see that Italy can refinance itself at a
lower cost than in the previous sale. There’s some optimism in
the market that perhaps things won’t get worse than it is now.”

Italy’s 10-year bond yield added two basis points to 5.79
percent after earlier rising as much as seven basis points to
5.84 percent. The five-year rate was six basis points higher at
4.81 percent, after climbing as much as 14 basis points before
the auction.

Spanish Bonds

Spanish Prime Minister Mariano Rajoy met French President
Francois Hollande in Madrid today as he considers seeking a
second European bailout after securing as much as 100 billion
euros in loans for banks.

Spain will decide on accepting a bailout when it is known
exactly what is on offer, Rajoy said at a press conference.

A day after Catalonia said it needed 5 billion euros from
an 18 billion-euro bailout fund announced by Rajoy last month,
an official in the southeastern province of Murcia yesterday put
its needs at 700 million euros. In Valencia, an official who
asked not to be named in line with policy confirmed remarks by
economy chief Maximo Buch to Europa Press that 3.5 billion euros
would cover only current needs.

Moody’s Investors Service is monitoring developments in
Spain “very closely,” Dietmar Hornung, a Frankfurt-based
credit analyst, said today in a telephone interview.

Possible Downgrade

“Risks in the euro area are reflected in the ratings we
have on euro-area countries themselves,” Hornung said. “Spain
is Baa3 and on review for a possible downgrade and we are
monitoring developments there very closely.”

Slovak Prime Minister Robert Fico said he sees a 50 percent
chance the 17-nation euro region will break up because of the
sovereign-debt crisis.

The fate of the bloc will depend on whether it is able to
handle situations in troubled countries such as Greece and Spain
and also on whether members are able to accept deeper
integration, Fico said at a press conference in Slovak capital
Bratislava.

Baring Asset Management may start buying Spanish and
Italian bonds if 10-year yields return to 7 percent, Alan Wilde,
the London-based head of fixed income and currencies, said in an
interview. Yields at that level will probably trigger action
from the ECB, Wilde said.

German government bonds returned 3.6 percent this year
through yesterday, according to indexes compiled by Bloomberg
and the European Federation of Financial Analysts Societies.
Italy’s rose 11 percent and Spain’s fell 2.4 percent.

Volatility on German government bonds was the highest in
euro-region markets today, followed by Spain, according to
measures of 10-year bonds, the spread between two-and 10-year
securities, and credit-default swaps.